Wednesday, November 3, 2010

The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said on Monday.

"I think a 20 percent decline in the dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors.

"When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory—that is a debasement of the dollar in terms of the supply of dollars on a global basis," Gross told Reuters in an interview at his PIMCO headquarters.

The Fed will probably begin a new round of monetary easing this week by announcing a plan to buy at least $500 billion of long-term securities, what investors and traders refer to as QE II, according to a Reuters poll of primary dealers.

"QEII not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices," Gross added. (more)

The price of sugar has jumped to a 30-year high as the Brazilian harvest has tailed off sharply, hardening expectations of a shortage.

Traders believe that prices could soar over the coming months as the market faces a supply shortfall driven by smaller-than-forecast crops in important growing countries from Brazil to Russia and western Europe.

At the same time, inventories are at their lowest levels in decades. “All buyers we see are buying on a hand-to-mouth basis,” said Peter de Klerk of Czarnikow, the London sugar merchant.

That has pushed prices up sharply, with raw sugar futures in New York soaring 135 per cent from a low of 13 cents in May.

On Tuesday ICE March sugar rose 4 per cent to a peak of 30.64 cents a pound, surpassing the level reached in February and rising to their highest point since 1980, when prices jumped to nearly 45 cents.

The dramatic rise in sugar prices is causing headaches for policymakers. While sugar is widely available in the west and its price is rarely considered, it is an essential source of cheap calories in emerging economies, where surging sugar prices are driving food inflation. (more)

Normally, a ratio of over 20-to-1 is seen as a bearish sign. A ratio of under 12-to-1 is bullish.

“Last time we had an insider sales ratio of over 30 times was in April, just before the markets went kaput for awhile. The so-called ‘Flash Crash.’ Then the ratio went under 12 for long stretches during June through September. During this time, the market has generally been rising.

“In October, we had a spike in insider selling. This indicates that at least as far as insiders go, stocks look fully priced.”

A King World News contact out of London has confirmed that, “Massive Asian buying is going to squeeze the shorts in the silver market. Any reactions in the price of silver will be heavily purchased, and these buyers will take delivery of physical silver.” The source who wishes to remain anonymous agreed with Eric Sprott that this squeeze could take the price of silver to $50 in a matter of months.

I have recently been discussing a coming commercial signal failure with John Embry, James Turk and Eric Sprott. As previously mentioned, this is an extremely rare event but when it occurs it is a sight to behold.

Right now, sentiment levels are nowhere near what we see at a top. Keep in mind that Rick Rule was recently discussing with KWN the possibility of future supply shortages in silver, and we are also not seeing the type of dealer activity that is suggestive of topping behavior. These factors are all supportive of a significant move higher in the price of silver.

While the price of silver on a short-term basis can gyrate, the important thing to be aware of right now is that these Asian buyers smell the kill. You can be assured that their intention is to put an incredible squeeze on the silver shorts before this is over.

The nation's homeownership rate is at the lowest level in more than a decade, hampered by a rise in foreclosures and weak demand for housing.

The percentage of households that owned their homes was unchanged at 66.9 percent in the July-September quarter, the Census Bureau said Tuesday. That's the same as the April-June quarter.

The last time the rate was lower was in 1999, when the rate was 66.7 percent.

The nation's homeownership rate was around 64 percent from 1985 through 1995. It then rose dramatically during the Clinton and Bush administrations, hitting a peak of more than 69 percent in 2004 at the height of the housing boom.

After the housing bubble burst, the rate has been declining gradually.

About 18.8 million homes, or 14.4 percent of all houses and apartments, were vacant, according to the government survey. That was down slightly from the second quarter of the year, when 18.9 million houses and apartments were vacant.

About 2.5 percent of all primary residences were vacant and for sale and 10.3 percent of all year-round rental units were listed as vacant and for rent.

From Goldman's Krag Gregory (Ph.D): "Expectations for QE2 and the election are high and fear as measured in options has been cut in half. We analyze the “optimal put” to buy for those who are fully invested, have participated in the recent market rally, and are concerned that the Fed or the election may disappoint. In a scenario where the market pulls back -2.5% by market close Wednesday, the optimal hedge is buying SPX November 1125 puts for $6.6, in our view." Yet the top recommendation by Goldman, based on some ironclad technical analysis, is that "VIX Futures are at 24.3, a hefty 12 points above or 2x the average realized vol level of 12 post midterm elections. If the FOMC and election results meet expectations, we see a scenario where implied vol could fall notably. We like using VIX options to position in a limited loss fashion." Therefore Goldman's two recommended trades: Trade1: Sell Dec-10 20-22.5 VIX call spreads for a credit of $1.2 (sell 20 calls/buy 22.5 VIX calls). Trade 2: Buy Dec-10 VIX 21 puts for $1.1. Of course, the past 12 midterm elections all occurred during an unprecedented market regime in which overall vol was trading in the 9-11 range, and as a result killed the swaption market. But who cares. All that matters is that Goldman wants to buy vol from its clients.